At Marks and Spencer executive bonuses returned last year. Store staff have had several pay rises. Prices for customers have been held down, as far as possible, and the retailer’s latest profits beat expectations. But shareholders are having to wait until early 2024 for their first dividend since before the pandemic.
The group, whose protracted turnround efforts have spanned seven UK prime ministers but finally appear to be having a lasting effect, axed payouts at the start of the pandemic to protect its balance sheet.
It will be among the last among major retailers to restart them — Next did so at the start of 2022 (and has been buying back shares too) while Primark owner Associated British Foods resumed dividends in late 2021. Supermarkets, which boomed during the Covid-19 crisis as restaurants and pubs were locked down, never fully stopped dividends.
Stuart Machin, the M&S boss, says the caution in resuming the payouts reflects lingering uncertainty over consumer demand and cost pressures. Some costs in the food supply chain have eased, but energy and wage bills are still elevated — and what effort it has made to keep prices down for consumers has eroded margins. The company also has a £200mn bond to repay at the end of the year.
But there is another factor at play. By the time M&S decides on the quantum of its interim payout, it will know whether it needs to find £156mn to pay Ocado the remaining consideration for its 50 per cent stake in Ocado Retail, the online supermarket jointly owned by the two companies.
The payment is contingent on Ocado Retail’s performance against an undisclosed target in the year to November 2023, and M&S has already reduced the estimated fair value of the liability on its balance sheet.
It is an irony that won’t be lost on the company’s army of small shareholders — individuals account for almost 98 per cent of investors by number — who dutifully stumped up four years ago in the £600mn rights issue that financed the bulk of the Ocado Retail transaction.
That deal, trumpeted at the time as providing a “profitable, scalable presence in the online grocery market”, also involved M&S taking over from Waitrose as a supplier of groceries to Ocado.
But it was expensive; the £562mn upfront consideration alone valued Ocado Retail at £1.12bn. For comparison, the Walker family acquired full control of Iceland, which has a similar UK market share of around 2 per cent and comparable annual sales, at an implied valuation of less than £200mn just a year later. As well as the rights issue, M&S cut its dividend by 40 per cent to help foot the bill.
During the pandemic Ocado Retail was profitable but not scalable — it could not expand capacity quickly enough to take full advantage of soaring demand.
More recently, as the pandemic’s online shopping bubble has deflated, Ocado has found itself with excess capacity and losses. Its contribution to M&S’s latest results was a hit of £29.5mn; analysts at Barclays expect losses to continue for the next two years.
The venture also requires funding and has drawn down £30mn from M&S as part of a shareholder loan facility, with further outflows of “up to £70mn” possible in the current year.
Machin has flagged initiatives to improve Ocado Retail’s performance, including adding more M&S lines to its ranges and increasing collaboration in areas like logistics and marketing. But Ocado Retail has its own board and Ocado the casting vote over its chief executive, so fixing the venture is not entirely within his gift.
That all changes next summer, when under the terms of the JV agreement M&S can opt to consolidate Ocado Retail’s results into its own.
This may be why Machin says he remains “very confident” that it will all be worth it in the end. And for the time being, enough is going right at M&S — its shares popped 11 per cent on Wednesday after its forecast-beating results — to earn some goodwill from the market.
But M&S shares have still underperformed those of almost all other major UK retailers, even ignoring dividends, since the Ocado Retail deal was announced in February 2019.
As they wait for payouts to restart, shareholders may feel entitled to ask whether M&S could have achieved the £600mn of sales it made to Ocado Retail last year through a simple supply arrangement rather than an increasingly costly joint venture.
